Deere shares slide on profit warning as uncertain farmers are not buying equipment

Deere & Co. shares slid 4.5% Wednesday, after the maker of agricultural equipment issued a profit warning for fiscal 2020 and said uncertain farmers are reluctant to invest in new equipment.

“Lingering trade tensions coupled with a year of difficult growing and harvesting conditions have caused many farmers to become cautious about making major investments in new equipment,” Chief Executive John May said in a statement. “Additionally, financial services results have come under pressure due to operating-lease losses.”

Moline, Illinois-based Deere DE, -4.30% said it expects 2020 net income to range from $2.7 billion to $3.1 billion, compared with a current FactSet consensus of $3.4 billion.

On the company’s earnings call with analysts, Chief Financial Officer Ryan Campbell said the company is launching a voluntary layoff program in 2020 that is expected to cost about $140 million and generate an annualized savings run rate of about $150 million, combined with actions already taken in 2019.

“Furthermore, we are undertaking an assessment of our overseas footprint as we work to serve our customers more efficiently,” Campbell told analysts, according to a FactSet transcript. “We will provide updates on our plans throughout the year during our quarterly earnings calls.”

Jefferies analysts said the warning combined with a lack of any kind of restructuring plan will likely disappoint investors. “We believe most investors expected a conservative fiscal 2020 outlook, but DE’s forecast of $2.9bn in net income at the mid point is 15% below consensus of ~$3.4bn,” analysts led by Stephen Volkmann wrote in a note to clients.

Investors were hoping to hear news on how the company is planning to meet its mid-term margin target for earnings before interest and taxes of 15% as the company seemed to indicate something new on its last conference call, said the note. The recent change of chief executive—May took up his role on November 4—was also viewed as an opportunity for a change of focus.

“While Deere is managing sales general and administrative costs and R&D, both slated to be down in fiscal 2020, the lack of any further specifics may be disappointing,” said the note.

The profit warning overshadowed a better-than-expected fiscal fourth-quarter performance. The company posted a net profit of $722 million for the quarter to Oct. 28, or $2.27 a share, down from $785 million, or $2.42 a share, in the year-earlier period. Sales rose 5% to $9.896 billion. The FactSet consensus was for EPS of $2.13 and sales of $8.467 billion.

Sales at the company’s agriculture and turf division rose 3% to $5.756 billion. Sales at its construction and forestry division rose 8% to $2.947 billion, but sales at its financial services division fell 66% to $261 million.

“Excluding tax-reform adjustments, the decrease in financial services net income for the quarter and full year of 2019 was mainly due to impairments and higher losses on operating-lease residual values and unfavorable financing spreads, partially offset by income earned on a higher average portfolio,” said the statement.

The company is expecting agriculture and turf sales to fall 5% to 10% in 2020. Sales in the U.S. and Canada are expected to fall about 5%, driven by weak demand for large equipment. In the European Union, sales are expected to be flat, while South American industry sales of tractors and combines are expected to be flat.

Construction and forestry sales are expected to fall 10% to 15%, due to slowing construction activity and the company’s efforts to manage dealer inventories.